Sunday, March 18, 2012

The Unique Personal Finance/Investment Benefits of Home Solar Panels

An interesting and important aspect of home solar panels is their unique investment and personal finance properties. In some ways they're a rare very low risk investment.

A cornerstone of finance is the risk-expected return tradeoff. The lower the risk of an investment, the lower an expected return it makes sense to settle for. And if the asset is negative risk (it lowers your current total risk), like insurance, then it can even make sense to accept a negative expected return. And people do that all the time when they buy fire insurance. A great example, too, though too few even economists seem to realize it, is global warming insurance.

With solar, you have an investment that can really lower a family's risk. And today's America is amazingly risky for most families (see Yale political scientist Jacob Hacker's book, The Great Risk Shift). A job loss can all too quickly and easily lead to ruin for a family, as unemployment insurance pays very little. A great defense is to have your house paid in full, and I usually advise a 15 year mortgage (when it does makes sense to buy), and even then, paying it off faster. But you still have utilities, property taxes, insurance, etc.

If you solar up your house, especially in a state like mine, Arizona, this means little or no utility bill, and eventually the panels may generate enough electricity to also mean no fuel bill (with electric cars). And even no property tax bill! Why? It's already common in Arizona to have backwards running meters to sell back excess power from solar panels (and it was offered in 43 other states in 2010), so the money you make from your home power plant can cover your property taxes. This, of course, depends on how many panels you have on your roof (and the rest of your property, solar gazebos!), what state you live in (not everyone lives in solar ground zero, Arizona), things like how southern facing your panels are, and the ever increasing efficiency of the panels.

Few people, even in Arizona, may generate the kind of power that covers your utilities, fuel, and property taxes today. But in 20 years, the power capturing ability of panels may double or quadruple (see, for example, here, here, and here). We can also expect big advancements in energy efficiency in our homes, appliances, and electric vehicles, also contributing to solar panels providing much more. And if solar starts providing these kinds of financial benefits, believe me, you're going to see a whole lot more people moving from cold states to Arizona, Nevada, etc. (more on this below). And panels are going to be put in a lot more places than just the southern facing part of the roof, along with perhaps other solar power capturing devices like special windows and walls.

Elizabeth Warren has what I think is the best personal finance book available today, "All Your Worth". In it she really stresses -- above all else -- the importance of keeping your "Must-Haves" (fixed expenses) low to withstand today's risky world. Solar is a very nice addition in this respect. The panels are typically guaranteed for 25 years, and may last much longer. And there are potential advancements that can extend lifespan, maybe greatly (see, for example, here and here).

Of course, you could just take the money you were going to put into solar and put it into some other very safe asset, like TIPS, but:

(1) The TIPS market can be funny and maybe illiquid, with TIPS real returns recently going negative.

(2) If you have the money in solar panels instead, it may not be touchable in bankruptcy, or by creditors or litigants in general. Many states protect your home, including additions, (homestead exemption), up to a large, or unlimited, amount. It definitely adds to your family's badly needed security knowing that no matter how bad things get, you can never lose your home, or your free electricity, fuel, and maybe regular supplemental income from your panels. Creditors and litigants can take your TIPS, but in many states they can't take your home, or your panels.

(3) When applying for college financial aid, often your home equity, including solar panels, is not considered. But I can guarantee you a hunk of money in TIPS is (unless perhaps it's in an IRA or 401k, but the panels should be on top of maxing your IRA and 401k contribution limits). The same is true of some government assistance and other need-based programs.

(4) The solar return can be really good, way better than TIPS. From what I've heard, a 7 year payback, or less, is not that rare already in Arizona. (yes, I know very well after years in finance, that NPV is the ultimate, but payback period can help you estimate NPV, because all other things equal, a shorter payback period means a less risky, less uncertain, project. So knowing the payback period helps you make a better decision on the discount rate to use.) The payback period depends a lot on the tax spiffs, and those can vary a lot by state. So interestingly, this study, found a shorter payback period in Massachusetts than Arizona.

(5) Solar Panels protect you against inflation too, and maybe a lot better than TIPS do. With TIPS, you get compensated for changes in the price of the CPI basket, but your purchases may be very different from the CPI basket. And if your family is in a financial crisis, you're not going to be purchasing much of the discretionary or luxury items that are in the basket, but electricity and fuel will be very important. A spike in their prices could really hurt you during a family financial crisis. It's very risk-decreasing knowing those things will always be free, or small, if you have to ride out a crisis.

In 20 years, if Obamacare survives for try-and-see to decimate the disinformation, it could be common for people to always have health insurance, power, and fuel for their cars that they can never lose, and maybe substantial supplemental income from selling solar power on top. This would certainly be a welcome huge step forward in families' security.

On a related note, I think in 20 years Arizona could really be hot -- in more ways than one. Advanced, powerful, and inexpensive panels (and other solar collecting devices like special windows and walls) could really make it relatively cheap to live there, with free utilities and fuel, and with selling the excess back to the grid free property taxes, homeowners insurance, and maybe more, the way the generation of these panels keeps increasing. I always tell my wife I want to turn our backyard into a solar plant! Gazebos with panels on top! She's not thrilled with the idea.

Next: Part II:  Home Solar Panels: A New Safety Net and More